I little while back I wrote about aligning incentives in situations where businesses provide services to other businesses. In the comments to one of those posts, Jack Kearney, one of my fellow Little DOCC-ers and Independent Representative for Fallbrook Capital Securities Corporation stated that he agreed with the overall premise of my posts and that he had more insight from his experience that he’d like to share. So I met with him a few weeks ago and today I’d like to share some highlights from that conversation.
First, I need to make a correction. Jack pointed out that he’d describe what I called a retainer as a subscription, and I fully agree with him on that. I won’t change the wording in the initial post but I will add a link to this post as a correction.
The services we are offering to clients is a monthly subscription to our services.
A retainer is different. A retainer is an up-front fee from one party to another. The retainer serves one primary purpose in two different ways: to ensure that the hiring party is serious enough to put money towards the relationship which also means that they have something to lose if they don’t follow through.
A retainer alone doesn’t align incentives. In Jack’s industry, incentives are aligned through a commission system. He is incentivized to do as well as he can for his client so he can get the highest commission and the commissions can be structured to provide even more incentive by increasing the percentage of payout at different tiers. For example, the first $5 could have a 5% commission, the second $5 could have a 7% commission, and the third $5 could have a 9% commission.
Commissions work well for his industry because the outcomes are binary – his business is to help companies get bought by other companies. The outcome is “the company sold for XX dollars.” Commission systems work very well with clear outcomes.
I can’t think of a way to make commissions work in the technology services industry because the outcomes are not binary. It is difficult to directly measure the benefits of having a great website or app. But maybe, with the right amount of effort and planning, a commission based system could be setup because being able to tell someone “I will make you this much money and only want this much of it” is a great way to both get buy in and align incentives. I’ll keep thinking about it in case I can figure something out.